Federal Funds Rate: What It Means for Your Savings

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What we’ll cover:

  • The federal funds rate can influence the interest rates that banks offer across various deposit accounts.
  • At the January FOMC meeting, the Federal Reserve held the target rate steady at 5.25-5.5%.
  • Looking ahead, Goldman Sachs Research economists anticipate the first rate cut to come in May.

When you’re shopping for a savings account, we bet the first thing that grabs your attention is the interest rate.

Makes sense! After all, interest rates can help give you an idea of how much you could earn from your deposits over time. Generally speaking, the higher the rate, the more you could earn.

But have you ever wondered how interest rates are determined in the first place? Who’s the proverbial hall monitor?

While interest rates can go up or down for a number of complex reasons, the Federal Reserve (or simply, the Fed) has a great deal of influence over them. That’s why whenever the Fed makes its rate announcement, the financial world hangs on to every word.

Remind me, what does the Fed do? The Federal Reserve is the central bank of the United States. It’s tasked with the important job of maintaining a stable economy by implementing monetary policies to promote maximum employment and stable prices.

In other words, the Fed works to make sure the US economy doesn’t run too hot (long period of growth with high inflation) or too cold (not enough growth).

Read more: “When the Fed Tapers, What’s Your Move?

The “rate” we’re talking about here is specifically the federal funds rate, which can influence the interest rates that banks offer across various deposit accounts, like a high-yield savings account or certificate of deposit (CD). It may also affect other products like mortgages and personal loans.

Reaching your goal starts with saving for it. 


What is the federal funds rate?

In the simplest terms, the federal funds rate is the interest rate that banks charge when they lend money to each other overnight. (Yep, banks borrow money, too. Usually it’s to help them meet their reserve requirements.)

The federal funds rate is set by the Federal Open Market Committee (FOMC), the monetary policymaking arm of the Fed. It meets about eight times a year to discuss and announce new target rates.

The federal funds rate is typically expressed as a range. For example, when the FOMC met in May 2023, the committee announced a target range of 5%-5.25%.

Remember earlier when we mentioned that the Fed’s job is to keep the economy stable?

Well, to carry this out, the Fed has to keep an eye on inflation (among other things) and make monetary adjustments as necessary to keep it in check.

How do they do this? One way is by adjusting the federal funds rate.

Here’s a high-level overview of how it works:

  • When inflation is too high, the Fed tends to raise its federal funds rate. This encourages people to save more, reducing the supply of money in circulation. The goal here is to help cool down the economy. It’s the Fed’s way of saying, “chill.”
  • When the economy is sluggish, the Fed tends to lower the federal funds rate to encourage borrowing to help stimulate the economy.

To be sure, there are more nuances to this. But for the purpose of this article, we’ll spare you the full-on lecture on monetary policy.

Let’s keep things moving and talk about how changes in the federal funds rate could impact your savings.

Federal funds rate and your savings: What’s the connection?

If you look up the federal funds rate, you may be scratching your head and thinking, “Hey, this isn’t the rate I have on my savings account, what gives?”

It’s important to understand that banks look to the federal funds rate only as a guide – not as a rule. Banks are not required to line up their interest rates with the Fed’s rate. So each bank will respond to the Fed’s rate announcement and adjust rates in their own way.

That being said, when the Fed raises the federal funds rate, banks tend to increase the rates they offer on deposit accounts. On the flip side, when the Fed cuts rates, banks tend to reduce their rates as well.

Now, banks don’t always have to wait for the Fed’s announcement to make a move. Sometimes, the anticipation of a rate increase is enough to spur banks to raise their rates for customers. (Nice!)

A friendly reminder: Keep in mind that rate changes may only impact certain existing accounts.

For instance, if you have a deposit account that offers a variable rate (like a high-yield savings account), you’ll likely see a rate increase in your account when the Fed raises its rate.

On the other hand, some deposit products come with a fixed rate (such as fixed-rate CDs). When the Fed changes its rate, if you already own a CD, your existing fixed rate won’t be affected for the term of your CD.

How Marcus aims to offer competitive rates 

Now that you understand why interest rates can change from time to time – you may be wondering how Marcus thinks about rate changes.

Great question!

Our team of experts puts a lot of thought into finding the right rates for our customers. Our primary goal is to consistently offer highly competitive rates across our deposit products, including our Online Savings Account and CDs.

To do this, we consider three key variables:

  1. The value we offer customers over the long term
  2. The federal funds rate
  3. The expectation of the federal funds rate


Let’s take a moment to talk about the expectation of the federal funds rate. Because when Marcus thinks about rates, not only do we look at the current federal fund rate, we also consider how the Fed is thinking about its rates moving forward.

Now, we don’t have a crystal ball. But here’s the thing: Even if the Fed doesn’t announce a rate change, they often signal how they might adjust rates in the future.

Our team at Marcus, along with our colleagues at Goldman Sachs, has been paying close attention to the Fed and other key developments in the economy.

Together, we put our expertise to work for our customers – to determine the right rate for you and share key insights about the rate environment for 2023.

The federal funds rate moving forward

At the January FOMC meeting, the Fed held the target rate steady at 5.25-5.5%. The FOMC noted in its post-meeting statement that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Looking ahead, Goldman Sachs Research economists now anticipate the first rate cut to come in May.

While it's hard to predict the future, we hope that this potential rate environment will encourage you to continue to save and work toward your financial goals.

Want more timely insights from Goldman Sachs? Don’t miss our updates at “Heard at Goldman Sachs.”

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs® but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.

Marcus by Goldman Sachs is a brand of Goldman Sachs Bank USA and Goldman Sachs & Co. LLC, which are subsidiaries of The Goldman Sachs Group, Inc. Deposits products provided by Goldman Sachs Bank USA. Member FDIC.

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